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Unformatted text preview: CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS 22-1 The goal of a management control system is to improve the collective decisions within an organization. This is accomplished by means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and employees. 22-2 To be effective, management control systems should be (a) closely aligned to an organization's strategies and goals, (b) designed to support the organizational responsibilities of individual managers, and (c) able to motivate managers and employees to put in effort to attain selected goals desired by top management. 22-3 Motivation combines goal congruence and effort. Motivation is the desire to attain a selected goal specified by top management (the goal-congruence aspect) combined with the resulting pursuit of that goal (the effort aspect). 22-4 The chapter cites five benefits of decentralization: 1. Creates greater responsiveness to local needs 2. Leads to gains from faster decision making 3. Increases motivation of subunit managers 4. Assists management development and learning 5. Sharpens the focus of subunit managers The chapter cites four costs of decentralization: 1. Leads to suboptimal decision making 2. Focuses managers’ attention on the subunit rather than the company as a whole 3. Increases costs of gathering information 4. Results in duplication of activities 22-5 No. Organizations typically compare the benefits and costs of decentralization on a function-by-function basis. For example, companies with highly decentralized operating divisions frequently have centralized income tax strategies. 22-6 No. A transfer price is the price one subunit of an organization charges for a product or service supplied to another subunit of the same organization. The two segments can be cost centers, profit centers, or investment centers. For example, the allocation of service department costs to production departments that are set up as either cost centers or investment centers is an example of transfer pricing. 22-7 Transfer prices are the prices one subunit of an organization charges for products or services supplied to another subunit of the same organization. The three general methods for determining transfer prices are: 1. Market-based transfer prices 2. Cost-based transfer prices 3. Negotiated transfer prices 22-1 22-8 Transfer prices should have the following properties. They should 1. promote goal congruence, 2. be useful for evaluating subunit performance, 3. motivate management effort, and 4. preserve a high level of subunit autonomy in decision making....
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This note was uploaded on 06/07/2011 for the course ACCT 101 taught by Professor None during the Spring '11 term at University of Illinois, Urbana Champaign.
- Spring '11